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Two-Layer Model of PBoC’s Digital Fiat Currency Made A Splash At ITU Meeting

As ICOs have been banned in some countries, cryptocurrencies’ prices fluctuate dramatically, and crypto-related hacking attacks have led to the loss of hundreds of millions of U.S.dollars, more and more central banks are seriously considering issuing digital fiat currencies (DFCs) in a bid to maximize economic gains. And China has been leading the world in the research and design of a DFC solution since 2014.

The second International Telecommunication Union (ITU) Workshop on Standardizing DFC and Applications was held at the Cornell University Bloomberg Tech Campus in New York City in late July, where hundreds of senior central bank officials, thought leaders from the crypto industry and scholars discussed the current developments in digital currency , as well as problems and challenges the industry has to address.

Yao Qian, the director-general of the Institute of Digital Money of the People’s Bank of China, shared with audience about the detailed function and architecture of the Chinese central bank’s two-layer model which he has proposed in an articled published in May,2017.

When it comes to the design principles for a digital fiat currency, Yao mentioned that a DFC should be secure and stable, convenient and efficient, and its patents should be controlled by a centralized agency. Besides, the DFC should adopt multiple layers and stay neutral.

Currently, the issuance of fiat currency in China follows the ‘central bank-commercial bank’ system, and most of the social and economic activities are based on the commercial bank account system. The emergence of the DFC will not only have a huge impact on the existing banking system, but also is a waste of resources for commercial banks if the central bank does not adopt the two-layer model.

Therefore, Yao suggested digital currency wallet should be added to the traditional account system of commercial banks, to allow one bank account to manage both electronic money and digital currency.

In implementation, digital currency wallet ID fields could be added to the bank account to enable the account-based and non-account-based models to co-exist and operate at different layers. The wallet acts as a safe box and is not involved in activities such as day-end counting and reconciliation, to minimize the impact on the existing banking core business system.

Through the two-layer model—the account in the commercial bank and the digital currency wallet managed by the central bank, the DFC is integrated into the ‘central bank-commercial bank’ system by leveraging the existing financial infrastructure. And more importantly, this approach takes into account the role of digital M0 in commercial banking system and enables digital currency to either operate independently or run in an environment where bank account and digital wallet co-exist and operate at different layers.

It’s without doubt that Chinese central bank’s two-layer model solution provides reference to the creation of other countries’ DFCs and their applications.